A new company will advise parents and grandparents on remortgaging homes to help children onto the housing ladder.
Tembo, which describes itself as a ‘family lending platform,’ enables first-time buyers to get on the housing ladder by brokering a small interest-only mortgage on their parents’ – or another family member or friend’s – home.
The money from the benefactor – which Tembo refers to as the ‘homebooster’ – is then put towards the child’s mortgage deposit, allowing them to buy their first property.
However, this route to homeownership comes with risks, as we explain below.
On the ladder: First-time buyers Jim Labisko, 49, and Sophie Gardner, 33, are using Tembo to help them buy their first properties with assistance from their parents
Tembo says it offers a way for parents who are not able to give their children a cash lump sum towards their deposit to help them buy a home.
The amount of equity they release and the terms of the mortgage are dependent on how much they wish to gift to their child.
By enlarging the first-time buyer’s deposit, their parents will also be giving them access to lower interest rates on their mortgage.
For example, the typical five year fixed interest rate for someone with a 5 per cent deposit is currently 4.07 per cent, according to financial information service Moneyfacts, while a borrower with a 40 per cent deposit would pay just 1.81 per cent.
‘I can finally start the next phase in my life – with Mum’s help’
Jim Labisko, 49, a lecturer from Kent, has been renting for decades. He is hoping to buy his first home with his Mum Eileen’s help. He says:
‘In the last ten years I had a career change, returned to education and got myself a degree and a doctorate and I’m currently working as a lecturer at a university in London.
‘I’m now in a position where I’ve got the opportunity to think about putting proper roots down.
‘I’ve been fortunate in that I’ve been able to come back and live at my Mum’s while I was finishing my PhD. Being here has enabled me to save, but it’s still difficult to get enough together for even a 15 per cent deposit. Prices are so high, and they have shot up even more this year.
‘I’m looking to buy anywhere that’s commutable to London, where I work. I just want to find a house that I’d be happy to stay in, probably for the rest of my life or until I retired.
‘My Mum is going to take out an interest-only mortgage on her house, which means I will have the dosh for a deposit and I can get something sorted.
‘I’m not looking for a massive place, it’s going to be just for me, so a one bed with enough space to work from home, somewhere quiet with a garden.
‘I’m hoping to get together 15 per cent, I’ve got a few quid which I can put towards that but I’m also aware that I will need to pay for fees and solicitors.
‘My Mum wouldn’t be able to loan me the money, so this is really the best, most sensible option. Otherwise I would have to save for longer for a smaller deposit, and be stuck with really high mortgage payments and possibly end up in negative equity if there was a crash.
‘She just wants to make sure I’m alright and wants me to have my own place, as any parent would do.
‘I’ve been at Mum’s a few years now, and before that I moved around quite a bit. Having somewhere I can put my bookshelf up and potter in the garden and have my own space to do the things I want to do will mean I can start the next phase in my life.’
However, there are risks. As with any mortgage, the parents’ home could be repossessed if they do not keep up repayments – and if the parent wants to move, they will need to repay the loan from the proceeds of the sale.
Parents will need to pay interest on the new loan every month, but Tembo says many buyers are offering to cover these costs themselves along with the repayments on their own mortgage.
It will recommend that family members take out mortgages where the balance doesn’t have to be paid off until either the property is sold or the family member dies.
Deposit boost: Tembo says it can help first-time buyers who are struggling to afford a home
This might be via a retirement interest only mortgage, for example.
Parents could take out an interest-only mortgage independently without Tembo’s help, but it says that it will help guide both the parent and the child through the whole process.
As well as acting as a mortgage adviser and broker, it says it also provides ‘smart technology’ which searches the mortgage market and calculates how much a person can save using Tembo.
It does charge its customers fees, which range from £249 to £749 depending on the borrower’s circumstances.
Prior to its official launch, it says it has provided mortgages for ‘thousands’ of customers amounting to £500million.
Of these, it claims 70 per cent couldn’t afford a property without their family’s support.
The model has similarities to equity release schemes, but Tembo says it is different because it will only recommend interest-only mortgages to the ‘homeboosters’, not schemes with no monthly repayments where interest can quickly mount up.
It said: ‘Equity release products don’t usually have any monthly payments, meaning the loan balance accumulates every month.
‘This often results in a big repayment years later as the interest continues to mount up.
‘Tembo only recommends interest-only mortgages where you pay off the interest each month to keep the balance under control.’
Richard Dana, chief executive and founder of Tembo, added: ‘First-time buyers and families are being priced out of the property market. We want to make it possible for anyone to own their own home.
‘By removing the barriers of affordability and deposit requirements for young people we can turn the tide on homeownership for the masses.
‘The added bonus of what Tembo does is that, by boosting the deposit, we can also save buyers tens of thousands of pounds by unlocking market-leading rates.’
Tembo is part of PRIMIS Mortgage Network, a network of brokers which is regulated by the Financial Conduct Authority.
This means it will offer mortgages from a panel of lenders rather than the whole market, but also that it may have access to deals that aren’t available elsewhere.
It is also part of the start-up business accelerator, Founders Factory, which in turn is backed by Aviva.
Expert view: Parents must make sure it’s right for them
This is Money asked independent broker David Baird of Aventur what parents and children need to consider when getting involved with family lending schemes.
He said parents in particular should do their research and make sure that taking out an interest-only mortgage is the right option for them. This might involve seeking independent advice.
‘Tembo is geared towards helping first-time buyers, but the parent is still a borrower and a mortgage customer, so they need to make sure that they are getting the right advice about whether or not a retirement interest-only mortgage is the way to go,’ he said.
‘Before jumping straight into a retirement interest-only mortgage, they might also want to consider equity release or a standard remortgage.’
He added that they should weigh up the impact that remortgaging their home might have on inheritance tax, and consider consulting an estate planner or independent financial adviser.
‘It could have longer-term implications on things like their retirement age,’ he added.
Finally, he said that that any customer taking a mortgage from a broker that uses a lender panel should check the deal they choose against the rest of the market.
‘I don’t want to rely on getting married to buy a house’
Sophie Gardner, 33, is from West Sussex and works in property.
Homes in the South Downs National Park where she is hoping to buy have shot up in the pandemic-fuelled housing boom – so her Dad Philip is going to help her by taking out an interest-only mortgage and boosting her deposit. She says:
‘I lived and worked in London for quite a few years and have decided to relocate back out to the countryside.
‘You obviously have a bit of a sacrifice in your salary, but I live in West Sussex in the South Downs National Park which is the same as buying a house in Chelsea financially.
‘We are an hour’s commute into London and people are considering here even more because they want outside space, so it has driven the prices crazy, and they were already pretty steep.
‘I’m on my own and not married, so I don’t have a huge income. I have a full-time job working in property but I have also set up a side hustle to try and put more money in the bank.
‘It can be quite demoralising as a single girl, but I work hard and I do everything I should. I’m not out burning money or wasting money online shopping every day and I still can’t buy a house, so it can be a bit tough.
‘I’m very fortunate that my parents are happy to help me get on the ladder. I have always rented, and apart from living at home with my parents there really is no other option.
‘I’m 33 and I don’t want to rent for the rest of my life, and I don’t want to rely on getting married to be able to buy a house.
‘I will have a 50 per cent mortgage and the other 50 per cent will come from my parents using Tembo. The repayments for me will be cheaper than rent so I will be able to benefit from less money going out, and invest in my own future as opposed to someone else’s pocket.
‘My parents have always been very cautious and they don’t take risks when it comes to their finances. They own properties with a significant value through their hard work, and they are now mortgage-free.
‘They want to help me, but not at their own risk and detriment, they want to be financially secure and I want them to be. They are happy to be helping me, and if they are able to and we can make it work that’s great.
‘I found a place off-market put in an offer. I’m not in a rush to buy, though – I want to buy the right thing.’